Municipal Research: How We Do it

MAY 2020 A Differentiated Research Process Can Achieve Positive Outcomes

Evaluating investment opportunities in the , now approximately 80,000 issues strong, has always demanded a rigorous research process. Thornburg Investment Management has delivered value in this asset class through a highly active approach for nearly 40 years, having introduced our first muni in 1984. Our benchmark-agnostic research process analyzes the issue and issuer, gauges ability and willingness to make payments, and reviews the bond structure. Such analysis allows the team to produce an internal rating for each muni bond. The team also integrates environmental, sustainability and governance (ESG) criteria into the research process for an additional lens on risk. Portfolio construction diversifies risk and mitigates transaction costs. Here’s how we do it.

IN-DEPTH ISSUE REVIEW IN-DEPTH ISSUER REVIEW Know the Structure General ƒ Provisions for Bondholders ƒ Demographics ƒ Gross vs. Net Revenue Pledge ƒ Workforce Distribution ƒ Unlimited vs. Limited GO Pledge ƒ Largest Taxpayers ƒ Senior or Subordinated Liens ƒ Largest Employers ƒ Bond Covenants ƒ Tax Structure ƒ Political Climate Assess Ability to Pay ƒ Management Quality ƒ Financial Ratios ƒ Socio-Economic Trends ƒ Fund Surplus or Deficit ƒ Headline Risk ƒ per Capita ƒ Legal ƒ Debt to Full Value ƒ Pledge to Bondholders ƒ Debt Service as % of Expenditures ƒ Definitions ƒ EBITDA Margins & Reserve Balances ƒ Covenants ƒ Liquidity ƒ Additional Debt ƒ Current vs. Future Liabilities ƒ Debt Service Coverage Ratios ƒ Additional Pledges – Assets/Revenues Gauge Willingness to Pay Financial ƒ Political Climate ƒ Management Quality ƒ Operations ƒ Socio-Economic Trends ƒ Revenue & Expense Growth ƒ Headline Risk ƒ Tax Revenue Sources ƒ Overall Tax Burden ƒ Leverage

THORNBURG INTERNAL Financial Indicators Subjective Indicators ƒ Total Fund Balance/General Fund Revenues (%) ƒ Management ƒ Net Direct Debt/Full Value ƒ Intercept Program ƒ Net Direct Debt/Total Government Revenues ƒ Disclosure ƒ Cash Balances as % of Revenue Integrated ESG Analysis: An Additional Lens on Risk

Thornburg’s ESG analysis is integral to our credit research process and uncovers additional risks that are exogenous and internal to the issue or the issuer. ESG ratings for muni bonds are not yet standardized in the industry and some have an issuer-assigned “green” status, which we believe they may not merit. Our evaluation system assesses each issue on a scale of “1” to “3,” with the top score being “1.” ƒ Environmental considerations provide an additional perspective on risks such as climate change impact or excessive carbon footprint growth. ƒ Sustainability criteria includes data on the changing income levels of municipality residents, the employment level, and demographic trends that will affect our investment for years to come. ƒ Governance investigation offers information on the quality of management, its ability to make tough decisions and its track record as a fiscal and resources steward.

ESG ANALYSIS CRITERIA THORNBURG ESG SCORING SYSTEM Environment: Operating Statistics Our scoring system is based on the evaluation of three key areas: ƒ Use of Proceeds – Climate Aligned ƒ Use of Proceeds ƒ Use of Proceeds – Harmful Technology ƒ Project Management ƒ Disclosure and Reporting Policies Sustainability: Economic & Social Census Score of 1: Top score shows use of the most advanced and environmentally sound ƒ Wealth Levels technologies in project design and execution; our assessment that the project’s purpose is ƒ Unemployment positively aligned with ESG principles as well as use of best disclosure practices. Example: ƒ Population Growth NYC Water Board Authority issue for watershed and water delivery, sewage system and ƒ Crime Statistics treatment construction and maintenance for NYC. Governance: Management & Governance Score of 2: Neutral score shows average score overall for key areas or some com- ƒ Emergency Preparedness bination of best and poor practices. Example: Martha’s Vineyard Land green muni ƒ History of Surpluses & Drawdowns bond issue for establishing a wildlife refuge to preserve adjacent private property holders’ ocean views. Score of 3: Poor performance score shows ESG considerations are low priority for the project, management and/or reporting. Example: Academy of Motion Picture Arts and Sciences green muni bond issue for construction and programs for museum and trade association headquarters.

Investing Through Conviction, Not Convention

Thornburg municipal bond investment decisions originate from a bottom-up analysis, but also incorporate a top- down macro analysis of the market. Our macro view helps the team manage risks related to rates and curve positioning. Because our team is composed of generalists, each member can look across sectors and discern relative value opportunities at the individual level. Our differentiated process offers investors advantages that include: ƒ Muni bonds carefully selected for performance potential and relative value ƒ ESG evaluations that uncover risk and opportunity ƒ Actively constructed and monitored portfolios designed to manage risk ƒ Reduced transaction costs through laddering ƒ Transparency about portfolio holdings, with no hidden derivatives or leverage With around one million muni CUSIPs in the market representing a wide range of risks and opportunities, our differ- entiated approach helps to pinpoint the relative value needed to deliver the outcomes muni investors expect. Important Information A assesses the financial ability of a debt issuer to make timely payments of principal and interest. Ratings of AAA (the highest), AA, A, and BBB are investment-grade quality. Ratings of BB, B, CCC, CC, C and D (the lowest) are considered below investment grade, speculative grade, or junk bonds. There is no guarantee that a sustainable investing strategy will perform better than a traditional strategy. Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security. The laddering strategy does not assure or guarantee better performance than a non-laddered portfolio and cannot eliminate the risk of investment losses. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses Bond Covenant – A legally binding term of agreement between a bond issuer and a bond holder. Bond covenants are designed to protect the of both parties. – A security whose price is dependent upon or derived from one or more underlying assets. EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization. An approximate measure of a company’s operating cash flow based on data from the company’s income statement. Leverage is the investment strategy of using borrowed money: specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment. Lever- age can also refer to the amount of debt used to finance assets. When one refers to something (a company, a property or an investment) as “highly leveraged,” it means that item has more debt than equity. Mortgage-backed Security – A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must be grouped in one of the top two ratings as determined by a accredited and usually pay periodic payments that are similar to payments. The mortgage must have originated from a regulated and authorized financial institution. – A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing dates.

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